7th February 2014

The guesswork is over. Current president of the Real Estate Developers'
Association of Singapore (Redas), Chia Boon Kuah, has been re-elected for the
two-year term ending this year.

The question of who the position would go to was thrown in the
air, after it was announced in October that Mr Chia would be leaving Far East
Organisation for GuocoLand.

This is because membership of the management committee is tied to
the company and not the individual.

Mr Chia was formerly the chief operating officer of property sales
and executive director at Far East Organisation. He took over from Quek Chee
Hoon as group president and CEO of Guocoland from Monday.

Developers' sentiment may have improved marginally in the fourth
quarter of 2013, but concerns over potential declines in residential property
prices and rising costs continue to cap their outlook.

In the
latest Real Estate Sentiment Index (RESI) survey, the Composite Sentiment Index
that captures the overall market sentiment of property developers increased to
4.0 in the fourth quarter of 2013, up from 3.9 in the third quarter.

The Future
Sentiment Index also edged up to 4.0 from 3.9 over the same period.

In this
index, developed by the Real Estate Developers' Association of Singapore
(Redas) and the National University of Singapore, a score under five is a flag
for deteriorating market conditions.

But some
62 per cent of the developers surveyed anticipate a moderate decrease in
residential property prices in the next six months, up from 51.3 per cent in
the third quarter.

The mixed
signals in the survey reflect market uncertainties, said Ku Swee Yong, chief
executive of property consultancy Century21. "This is solid evidence that
we are uncertain about the prospects of the market over the next six
months."

Some 39
per cent of the developers surveyed expect new property launches to hold at the
same level in the next six months while 22 per cent expect moderately more
launches and 14 per cent indicated that they would launch substantially more
units, up by 11.3 per cent from the preceding quarter.

"Unless
there are changes to external factors affecting the real estate market, the
sentiments are expected to hold for (the) time being," said a survey
respondent. "The sentiment will not be improving because government will
intervene to cool the market."

Prime and
suburban residential sectors were the worst-performing segments in the fourth
quarter.

Sentiment
in the prime residential segment showed a current net balance of -53 per cent
and a future net balance of -44 per cent while the suburban residential segment
showed a current net balance of -47 per cent and a future net balance of -57
per cent.

The net
balance is the difference between the proportion of respondents who were
optimistic and those who were pessimistic.

In a bid
to cool the residential property market, the Singapore government introduced
the TDSR (Total Debt Servicing Ratio) framework last June, requiring financial
institutions to consider borrowers' outstanding debt obligations and ensure
that their monthly debt obligations stay within 60 per cent of their monthly
income. This has since dealt a blow to developers' sentiment.

"The
cooling measures are taking effect. It depends on how the market reacts for
developers to moderate lower price launches on new units," said another
survey respondent.

"Developers
who do not have any holding power may dispose units at further discounts at
about 3-5 per cent. However, a market crash is unlikely due to fairly strong
underlying demand."

Seen as
more resilient, the office segment is viewed by developers as the best
performing with a current net balance of +27 per cent and a future net balance
of +20 per cent in the fourth quarter.

Developers
expressed concerns over rising costs, with 46 per cent of the respondents
saying that they are very concerned about higher land costs and 54 per cent
flagging concerns about labour costs.

-By Lynette Khoo

More developers
expect lower housing prices: Poll

Source: Today Online / China & India

More property developers expect housing prices to fall in the next
six months, according to the latest quarterly survey conducted jointly by the
National University of Singapore (NUS) and the Real Estate Developers
Association (REDAS).

The NUS-REDAS Real Estate Sentiment Index (RESI) fourth-quarter
survey results published yesterday showed that 62.9 per cent of developers
expect moderately lower housing prices in the near term, sharply above 51.3 per
cent in the previous quarterly survey. A little less than a third of developers
surveyed — 31.4 per cent — anticipate prices to hold at prevailing levels, down
from 35.9 per cent in the previous survey.

On housing supply, 13.9 per cent of developers said they would
launch substantially more units, up 3.6 percentage points from the last
quarter. About 22 per cent of them expect moderately more launches while 38.9
per cent anticipate launches to hold at the same level in the next six months.

The bearish sentiment in the housing sector comes despite
developers becoming slightly less pessimistic about the overall property
market.

The RESI survey showed that the Composite Sentiment Index, an
indicator of overall property market sentiment in Singapore, rose to 4.0 in the
fourth quarter from 3.9 in the third. The Current Sentiment Index increased to
4.1 from 3.9, while the Future Sentiment Index rose to 4.0 from 3.9. Nonetheless,
all the readings stayed below the 5-point mark, which divides deteriorating
market conditions and improving ones.

“Despite the slight increase in the sentiment index in the fourth
quarter, the overall market sentiment was still below the neutral line of five.
Developers will be more cautious in the projection of future launches and
prices for new development projects over the next six months,” says Associate
Professor Sing Tien Foo of NUS Department of Real Estate.

The survey also showed 46 per cent of developers to be “very
concerned” with rising land costs. The high land costs over the past few years
could be due to stiff competition from hungrier developers who may have access
to foreign capital to bid aggressively, NUS said.

Meanwhile, labour costs continue to be the major concern over the
next six months, with 54.3 per cent of developers highlighting this worry in
the face of higher foreign worker levies.

Tweaking or removing some curbs would give foreign
investors the 'right signal'

Source: Business Times / Top Stories

For property players, there is one Budget wish above all else:
that some of the cooling measures introduced previously - including the total
debt servicing ratio (TDSR) and additional buyers' stamp duty (ABSD) - might be
tweaked or even rolled back.

"Our wish is for the government to consider scaling back or
loosening up certain measures which have yielded the desired results,"
said Donald Han, managing director at Chesterton Singapore.

After all, sub-sales and foreigners' participation rates are now
at a new low compared to two years ago, largely due to the successful
implementation of the sellers' stamp duty (SSD) and ABSD. Also, the TDSR
framework has single-handedly put a check on escalating property prices and
transaction volumes.

Reviewing these policies would send the "right signal"
to foreign investors, said Mr Han.

Bank of China giving up to 95% loan, UOB 70% and
OCBC 50% of valuation

Source: Business Times / Top Stories

Buying property in Japan used to be the preserve of high-net-worth
individuals, who would plonk down $1.5 million for a chalet - complete with
outdoor hot tub - in Niseko, a popular Hokkaido ski resort, if only to indulge
their love for skiing.

Not any more.

With the local banks now offering to finance property purchases in
the Land of the Rising Sun, anyone with $1 million or so to spare can consider
buying a property and living, possibly, in the heart of glitzy Roppongi in
Tokyo and rubbing shoulders with the embassy types there.

A budget of that size could get one a new freehold two-bedroom apartment
with roof terrace in Minato-ku - something along the lines of what Orange Tee
is launching this weekend.

Median cash-over-valuation (COV) premiums for Housing and
Development Board resale units dived from $5,000 in December to $3,000 last
month - similar to the previous low in June 2009 during the Global Financial
Crisis - as eight out of the 28 HDB towns saw zero or negative median COV.

While the
data does suggest that HDB resale prices are stabilising - given that
transactions are being done at valuation prices - it needs to be read in light
of the low transaction volumes in December 2013 and January 2014 which in turn
can translate to a wide range of COV figures, said Nicholas Mak, executive director
at SLP International.

Sengkang
and Punggol led the drop in COV with negative overall COVs recorded in January,
while Bishan, Geylang, Jurong West, Sembawang, Woodlands, and Yishun recorded
zero overall median COV, according to the flash report by the Singapore Real
Estate Exchange (SRX).

"In
the case of Bishan, the number of transactions used to derive the COV number in
January 2014 is less than 10, which is not statistically robust enough. It can
be zero in January and change to big numbers in the next few months," he
said.

The report
also showed that resale prices gained a marginal 0.3 per cent in January,
thwarting the general decline in monthly prices since April 2013. This was
based off an estimated 893 transactions in January, a 34.6 per cent year-on-year
drop.

Despite
the reversal in price trends, it might be too hasty to assume that prices are
bottoming out given that the prices are based on a limited number of
transactions and are thus susceptible to wild swings, said Ong Kah Seng,
director at R'ST Research. Indeed, Mr Ong expects that there is still potential
for prices to fall by about 5 per cent in the first half of this year before
starting to stabilise.

"This
monthly volatility is exacerbated by uncertainty in the HDB resale market
following the implementation of the mortgage servicing ratio (MSR) in August,
compounded by the different types of flats transacted between months,"
said Mr Ong.

For
instance, the rise in average prices could be due to increased interest in
smaller sized flats due to the MSR cap limiting large loans, he suggested.

Separately,
the report also showed that almost three in 10 HDB deals closed below
valuation.

Based on
transaction records from SRX member agencies, 28.5 per cent of HDB resale deals
were closed below valuation in January, compared with 20.4 per cent in
December. January's number is also higher than the previous high of 26.0 per
cent in April 2009.

Looking
ahead, Eugene Lim, key executive officer at ERA Singapore said he expects to
see more deals closed below valuation as sellers become more realistic. That
being said, flats with good attributes, such as being located close to an MRT
station, should be able to hold their prices reasonably well, he qualified.

There
should also be a pick-up in transaction volume after the Chinese New Year
festivities.

"Transaction
volume in March, April, and May are likely to set the pace for the rest of the
year," said Mr Lim.

On the
rental front, an estimated 1,319 HDB flats were rented in January, 6.8 per cent
less than December's 1,415 transactions. Rents stayed constant at $2,300 in
January after two consecutive monthly drops in November and December.

-By Mindy Tan

January COV falls to level not seen since 2009 financial
crisis

Source: Channel News Asia / Singapore

The median cash-over-valuation (COV) for Housing and Development
Board (HDB) resale flats fell to S$3,000 in January, matching the previous low
in June 2009 during the global financial crisis.

Analysts Channel NewsAsia spoke to expect the COV to fall
further, with 24,300 Build-to-Order (BTO) flats slated to be launched this year.

According to data from the Singapore Real Estate Exchange (SRX),
the median COV sank to S$3,000 last month from S$5,000 in December.

In January, 893 HDB resale flats were sold -- a slight drop from
the 910 units sold in December.

On a year-on-year basis, January's resale volume was a 34.6 per
cent drop.

PropNex CEO Mohd Ismail attributed the HDB resale market
condition in January to "various cooling measures put in place working at
their best."

He noted the measures include the ruling that a permanent
resident who intends to buy a resale flat has to wait for at least three
years.

"And the mortgage servicing ratio has been reduced to 30
per cent. That has a big impact. A lot of Singaporeans who want to enter and
buy a resale property, which has already gone up in prices, find it a big
challenge to enter the market," he added.

Real Centre Properties’ executive director Thomas Tan said:
"BTO launches, the huge supply that the government has released, this will
tell you that the government is telling first-timers, 'if you are a
first-timer, please buy HDB flats instead of from the resale market'. And this
has taken quite a fair bit of demand, especially from the first-timers in the
resale market."

Several HDB towns saw zero or negative median COV.

Punggol led the drop with almost 70 per cent of transactions in
the area seeing negative COVs.

This is followed closely by Sengkang and Jurong West.

And island-wide, almost three in 10 HDB deals closed below
valuation.

But resale prices gained a marginal 0.3 per cent in January,
going against the general decline in monthly prices since April 2013.

The
construction industry has long been seen as a laggard in terms of stepping up
productivity, but the Government's push to restructure the economy has forced
contractors big and small to redouble their efforts to cope. Some progress has
been made as companies mechanise and use prefabricated building components, but
improvements have been uneven.

Barclays Plc (BARC), the U.K.’s second-largest bank by assets, is moving its employees from an eastern Singapore suburb to its offices in the city’s central business district to cut costs.

Barclays will exit Changi Business Park and move its staff to the space it already occupies at Marina Bay Financial Centre in the city’s downtown, the bank said in an e-mailed statement. About 200 people will be relocated, according to two people with direct knowledge of the move, declining to be identified because the information isn’t public.

“Consolidating our corporate real estate footprint will help us run our businesses with greater efficiency and cost discipline,” Barclays said in the e-mail, declining to elaborate on the number of people affected by the move. The employee relocation in Singapore “consolidates many technology teams in one location.”

Barclays Chief Executive Officer Antony Jenkins, who took office in August 2012, said a year ago that he’s seeking to remove 1.7 billion pounds ($2.8 billion) of annual expenses by 2015, eliminating 3,700 positions. The lender is cutting commodities jobs from London and New York, while eight managing directors from Asia are departing, people familiar with the matter said last month.

Marina Bay

After the move to Marina Bay, the bank, which has been in Singapore for 40 years, will have a total of three offices in the island-state, including One Raffles Quay, also in the Marina Bay area, and the eastern suburb of Tampines, according to Barclays.

The bank occupies about 290,000 square feet at Marina Bay Financial Centre, part of the 360-hectare (890-acre) Marina Bay development that Singapore started building in 2005 on reclaimed land located at the southern part of the country. The lender occupies another 96,000 square feet at One Raffles Quay, also part of the same area, according to Barclays.

Monthly rents in these two buildings were about S$10 ($7.88) a square foot at the end of last year, according to Chesterton Singapore Pte, a real estate consultancy. That compares with S$4 at Changi Business Park, where Barclays now occupies 29,000 square feet and S$5 at Tampines, where it leases 15,500 square feet, based on Chesterton’s rental data.

While the move is aimed at reducing costs in the island-state where Barclays has businesses including corporate banking and wealth management, signs of a recovery in the country’s commercial property may weigh on such relocations, according to Donald Han, managing director of Chesterton.

“If you’re looking at moving operations back into the central business district, the risk and danger is that rents have bottomed out anecdotally in the fourth quarter of last year, and there is a propensity for rents to start increasing again,” Han said.

In 2007 and the early part of 2008, before the global financial crisis, monthly rents at Raffles Place, a part of the central business district which sits at the mouth of the Singapore river, were S$18 a square foot, Han said.

The Council for Estate Agencies (CEA) and the Consumers
Association of Singapore (CASE) will hold a seminar this month covering a wide
range of topics including property financing, engaging a real estate
salesperson and investing in non-residential properties.

The third of a four-part series that kicked off last August, the
seminar will be held on Feb 22 from 10am to 1pm at the NTUC Centre, 1 Marina
Boulevard.

Among the speakers are SingCapital CEO Alfred Chia, who will
discuss property financing options, especially in the light of the Total Debt
Servicing Ratio framework, which was implemented last June.

Mr Sebastian Quek, a central committee member of CASE, will share
tips on how to engage a real estate salesperson, as well as spell out the
responsibilities and obligations of the agent. The CEA handles more than 1,000
complaints a year, often over unprofessional or poor service from real estate
salespersons, where they give wrong advice, do not follow proper procedures, or
fail to be punctual for appointments.

Better performance of Aussie portfolio lifts
distributable income by 33.2%

Source: Business Times / Companies

ASCENDAS Hospitality Trust (A-HTrust) reported a 33.2 per cent
jump in distributable income, from $12.5 million to $16.6 million, mainly due
to improved performance of the Australia portfolio, full quarter contribution
from Ibis Beijing Sanyuan, and new income from Park Hotel Clarke Quay, which
was acquired in June last year.

For the quarter under review, net property income (NPI) rose 36.9
per cent from $17.1 million to $23.4 million while gross revenue rose 10.0 per
cent from $51.4 million to $56.6 million.

Said Tan Juay Hiang, chief executive officer of the managers,
Ascendas Hospitality Fund Management and Ascendas Hospitality Trust Management:
"Despite the challenging economic climate in Australia, our hotels there
achieved an increase in revenue per available room (RevPAR) of between 6 per
cent and 18 per cent as compared to the corresponding period last year. This
was due to the successful asset refurbishment programme and the rebalancing of
the guest mix to higher yielding market segments."

FRASERS Centrepoint Limited said that although it is exploring listing a hospitality real estate investment trust (Reit) on the Singapore Exchange (SGX) mainboard and submitted a listing application to SGX for review, no decision has been made on whether the transaction will take place. The terms at which properties will be injected into the Reit, the offering timeline, and the appointment of the underwriters have also not been decided. The company was responding to a Reuters report yesterday which said that it was looking to raise up to $600 million through listing a hospitality trust in the second quarter of the year. The article also named DBS, HSBC, Morgan Stanley and UOB as deal advisers.

In its filing with the SGX yesterday, FCL said it had not decided
whether to proceed with listing the REIT, which would hold assets including
hotels and serviced residences owned by the company and its majority
shareholder, Thailand’s TCC Group, also controlled by Mr Charoen. The potential
size of the initial public offering and other deal terms also have not been
finalised, FCL said.

Sources with direct knowledge of the matter said the IPO is likely
to raise S$500 million to S$600 million and take place in the second quarter.

The listing would mark the first step towards the merging of the
property assets of Mr Charoen’s business empire, operating under FCL and TCC
Group, after the tycoon won control of drinks-and-property conglomerate Fraser
and Neave (F&N) in a S$14 billion deal last year.

FCL has since split from F&N into a separately listed property
company, with the latter returning S$4.7 billion to shareholders as part of a
capital reduction last year. If dividends are included, Mr Charoen’s deal to take
over F&N is profitable, especially after the split, which now reflects a
better market value of its Singapore property business, one of the sources
said.

FCL, which was listed on the SGX last month, has a portfolio of
residential, commercial and hospitality properties worth more than S$10
billion. Its Frasers Hospitality arm owns serviced residences in Singapore,
Europe, North Asia, South-east Asia, the Middle East and Australia, offering
about 8,000 apartments in more than 30 cities, according to its website.

U.S.
millionaires see real estate as the top alternative-asset class to own this
year, according toMorgan Stanley. (MS)

About 77 percent of investors with at least $1 million in assets
own real estate, according to a survey released today by the New York-based
investment bank’s wealth-management unit. Direct ownership of residential and
commercial properties was the No. 1 alternative-investment pick for 2014, with
a third of millionaires surveyed saying they plan to buy this year.
Twenty-three percent said they expect to invest inreal estate investment trusts, the
second-most popular choice.

Wealthy investors are turning to a rebounding real estate market
as fixed-incomeyields remain historically low andequitiessurge.
U.S. commercial-property values rose 8 percent in the 12 months ended Jan. 31,
and have jumped 71 percent since hitting their post-recession bottom in 2009,
research firm Green Street Advisors Inc. reported today. The
S&P/Case-Shillerindexof
home prices in 20 cities is up 24 percent from its 2012 low.

“After a year where the Standard & Poor’s Index rose 30
percent, some millionaires are moving money out of traditional, long-only
strategies to find outperformance, and turning toward alternatives such as real
estate and private equity,” said Gary Kaminsky, a vice chairman at Morgan
Stanley Wealth Management in New York. “Sophisticated, high-net-worth investors
are much more concerned about losses.”

Collectibles
ranked as the third-most-popular alternative-investment choice this year, with
20 percent of millionaires saying they planned to buy, followed by private
equity at 19 percent and precious metals at 16 percent.

Interest Rates

Wealthy investors see stocks getting expensive and interest
rates staying stable or even declining over the next couple of years, Kaminsky
said in an interview at a conference for Tiger 21 investors last week in
Scottsdale,Arizona.
That’s why they are looking more closely at alternatives including real estate
for returns and income, he said.

Tiger 21 members, who have at least $10 million in investable
assets, increased their average allocation to real estate last year to 21
percent as of the fourth quarter from 19 percent in the first three months of
2013, according to a separate study released by the New York-based group last
month.

Will Ade, a Tiger 21 member, said real estate is a particularly
attractive investment as stocks show vulnerability in 2014. The S&P 500 has
fallen more than 4 percent this year, whiledeveloping-country stockshave tumbled on concern that the
outlook for economies is worsening.

‘Lame’ Bull

“We had a great bull run last year,” Ade, a 60-year-old
geologist, said in an interview today. “I don’t know if the bull is dead, but
it certainly is lame right now.”

This year may be the tail-end of attractive investments in
property before interest rates rise, said Ade, who has made his money finding
oil companies and private investors to fund the drilling of wells. He said he
is trying to purchase residential real estate in Miami right now.

Foreign Buyers

The Manhattan high-rise condominium buildings One57 and 432 Park
Ave., where units have gone under contract for more than $90 million, are
evidence of the faith that the very wealthy have in real estate, said Mitchell
Roschelle, real estate advisory leader at PricewaterhouseCoopers LLP. Such
properties have also attracted international buyers.

Wealthy foreigners have bought high-end U.S. properties for
their safety and because they’re denominated in dollars, the world’s reserve
currency, he said. This helps domestic millionaires maintain the value of their
property investments.

“It creates competition, which drives the price up for
everybody,” he said. “The sellers have multiple channels to sell into. That
gives you more liquidity.”

Self-storage properties are among commercial real estate
investments wealthy individuals are buying, Kaminsky of Morgan Stanley said.
Retail shopping centers are seen as less attractive as more consumers shop
online through companies such as Amazon.com Inc., he said.

Chilean Fund

Morgan Stanley Wealth Management surveyed 1,004 U.S. investors
ages 25 to 75, with least $100,000 in assets, during the fourth quarter of last
year. A third of them had more than $1 million.

BigSur Partners, a Miami-based wealth-management firm, has been
helping some of its wealthy clients, who usually have at least $50 million,
work with institutional investors such as a Chilean pension fund to invest in
commercial real estate, said Chief Executive Officer Ignacio Pakciarz. Deals
include an office building in Princeton, New Jersey, he said.

Owning the real estate is attractive because of the expected
appreciation of property value and stream of rental income, as well as better
control and supervision over the investments, he said. The firm has also bought
office properties in Pittsburgh andBoston,
multifamily residences inTexasand some industrial buildings for
clients, and is looking for more opportunities this year in real estate
purchases or lending, he said.

Values rose 1.1 percent to an average 175,546 pounds ($286,000), the unit of Lloyds Banking Group Plc said in a statement in London today. From a year earlier, prices advanced 7.8 percent, the data showed.

“With the supply of properties being slow to respond to more buoyant market conditions, stronger demand has resulted in continued upward pressure onhouse prices,” saidMartin Ellis, a housing economist at Halifax. Pressures on household finances may constrain the rate of growth in the future, he said.

A better economic outlook, government incentives and record-lowinterest rateshave fueled a revival in the property market, prompting the Bank of England to end its support for home loans. Ernst & Young LLP’s Item Club said this week London’s market is starting to show signs of a bubble.

In the three months through January, home prices rose 1.9 percent from the previous three months, today’s data showed.

“Low interest rates and higher consumer confidence underpinned by signs that the economy is recovering,” have bolstered demand, Ellis said.

BOE policy makers will keep thebenchmark rateat an all-time low of 0.5 percent today, according to all 57 economists in a Bloomberg News survey before the announcement at noon.

J.C. Penney Co.
(JCP)reached an
agreement with three companies to develop 240 acres (97 hectares) surrounding
its headquarters in Plano,Texas, as real estate demand climbs in
the area.

The development, to be called Legacy West, will be built at the
southwest corner of theDallasNorth Tollway and State Highway 121,
J.C. Penney said in a statement today. The project will be managed by Karahan
Cos., Columbus Realty and KDC, said the retailer, which has raised more than $3
billion in the past year through borrowings and stock offerings to avoid a cash
shortfall.

“That submarket has done really well and that’s right where that
J.C. Penney land is,” Greg Biggs, a Dallas-based managing director at
commercial real estate brokerageJones Lang
LaSalle Inc. (JLL), said in a telephone interview. “It’s right
in the heart of it.”

J.C. Penney this week reported its first same-store sales gain
since 2011 after Chief Executive Officer Mike Ullman revived popular
private-label brands and brought back sales events that former CEORon Johnsonhad done away with. The company last
month said it planned to close 33 stores and eliminate about 2,000 jobs to help
save $65 million a year.

J.C. Penney rose 8.4 percent to $5.66 at the close in New York
trading for the largest gain since Nov. 1. The shares have declined 71 percent in
the past year.

Perot Development

The Legacy area, where J.C. Penney has its headquarters, was created byRoss Perot, the former presidential candidate and founder of Electronic Data Systems Corp., according to the city of Plano’s economic-development website. About 60,000 people live and work in Legacy, a master-planned area in northwest Plano, according to the website.

“The partners that they have chosen were significantly involved in the success of Legacy Town Center and Legacy itself,” Biggs said. “They’ve done it before, and I believe they’ll be able to duplicate it and do it again.”

Joey Thomas, a spokesman for J.C. Penney, declined to comment on the financial terms of the deal.

The vacancy rate foroffice spacein the far north area of Dallas was 8.7 percent in the fourth quarter, according to data fromJones Lang. That compares with total office vacancies of 19.6 percent in the Dallas area, according to Jones Lang. Asking rents in the far north market averaged $28.16 a square foot for top-tier space, a high for the area.

“We have seen a great deal of business and residential growth around thehome officeover the last 25 years, and now is the time to capitalize on this attractive asset,” Katheryn Burchett, senior vice president of real estate and property development at J.C. Penney, said in the statement.

About 1.4 million square feet (130,000 square meters) of speculative office development is under way within four miles (6.4 kilometers) of J.C. Penney’s headquarters, Biggs said.

“You’re looking at quite a bit of space, but the market seems confident that it will all be leased,” Biggs said.

In 2007, soon after the Russian city won the bid to host the
2014 Winter Olympics, cosmonaut Fyodor Yurchikhin took a photo of it from the
International Space Station: a snarl of streets and housing near the beach on
the Black Sea giving way to undeveloped foothills and valleys.

Last year, before Yurchikhin returned from space bearing the
Olympic Torch, he took another shot of Sochi. The reborn city boasts several
thousand new and rebuilt roads, squares, bridges, airport runways, hotels,
apartment buildings and Olympic arenas for ice hockey and today’s opening
ceremonies.

President Vladimir Putin’s ambition goes beyond a show of
Russian prowess in creating an Olympics with arenas shaped like a frozen water
drop and a snowy peak. Using the Games as a springboard for Sochi, Putin pledged
a year ago to elevate the tourist area for middle-income Russians into “one of
the leading world resorts.” As the Games begin, the president’s goal for Sochi
is looking like a miscalculation.

“Putin wants Russians to get that feeling of a great country
back, that feeling that was lost after the Soviet Union collapsed,” saidOlga Kryshtanovskaya, a sociology
professor who is researching the country’s business and political elites at the
Russian Academy of Sciences. “Sochi is his mobilizing project at a colossal
expense and maybe at the cost of overstressing the economy.”

Overbuilding Sochi

The state banks and billionaire developers who helped spend a
record $50 billion to fuel Putin’s vision face possible losses after
overdeveloping the coastal city, said Ilya Volodko, a director of Macon Realty,
a firm that researches Sochi’s property outlook. Developers built five times as
much space as the market can absorb in the next three years at a time when
sales are stagnant, Volodko said.

They added more than 4 million square meters (43 million square
feet) of housing and hotel space, according to the Federal Statistics Center
and documents from the state corporationOlympstroy. That’s about 60,000 units
filling several thousand buildings spread throughout Sochi. The new apartments
amount to a 60 percent expansion of housing in Sochi, where about 345,000
people reside.

Russian banks may try to bring down mortgage rates, currently at
12.5 percent, to help sell residences in Sochi, said Evgeniya Starkova,
marketing director of MR Group, a Sochi real estate developer.

Stalin’s House

“Banks will try to raise attractiveness and stimulate demand”
for the properties that will hit the market when the Olympics end, Starkova
said.

Still, mortgage rates in the south ofFranceare about 3.5 percent, according to
Empruntis.com, a website that compares borrowing costs.

“This year will be decent for Sochi in terms of tourism because
there is big Olympic interest,” said Yuri Barzykin, vice president of the Russian
Tourist Industry Union and a former vice governor of the Krasnodar region that
includes Sochi. “Troubles will begin when the year ends. Sochi housing
construction looks like those citiesChinais building inAfrica.
These monsters will stand vacant and then will be pulled down.”

Sochi is just the latest of Putin’s projects meant to engender
national pride. Russia spent $21 billion on the reconstruction of Vladivostok
onRussia’s
Far East ahead of 2012 APEC Summit to promote economic cooperation in the
Pacific Rim.

Rocky Beaches

Sochi, which runs more than 100 kilometers (62 miles) along the
Black Sea in southern Russia, has for decades been a popular destination for
bureaucrats and employees of state-owned companies. After the 1917 Revolution,
Sochi was designated as a federal resort city and by the 1930s the government
had put up about 60 hotels offering healthcare and resorts with nearby
restaurants. Soviet dictator Joseph Stalin had a dacha, or country house, in
the city.

The subtropical city, with an average temperature of 73 degrees
in July, has narrow, rocky beaches next to a busy highway lined with
dilapidated cement walls. The water near shore is brown because of the recent
partial reconstruction of the Mzymta’s riverbed. The river brings tons of mud
from the foothills of the Caucasus Mountains to the sea.

Siberian Vacationers

By the 1990s, central Sochi had become a mix of grim Soviet-era
apartment towers, hotels, small houses, palm trees and year-round traffic jams.
About 3.8 million Russians vacationed there last year, according to Dmitry
Kozak, a deputy prime minister, at a press conference in Sochi this week.
Wealthier Russians head to European ski resorts, Asian seaside hotels and
African safaris instead, said Nikolay Kazanskiy, a managing partner at Colliers
International Russia, a real estate consulting firm.

“Sochi is the city for guys from the Ural mountains and
Siberia,” he said.

Putin and Kremlin officials stay in Sochi’s exclusive resorts
away from the masses. The president favors Bocharov Ruchei, a compound with a
private beach and a botanical garden.

Today in Sochi, wider streets, boutiques selling Ulysse Nardin
watches and Louis Vuitton handbags, and a plethora of new glass and steel
towers are not the only things that stand out. Visitors can’t miss the hundreds
of “For Sale” signs hanging from those buildings.

With more than 15,000 new units on the market by the time the
Olympics end, Macon Realty’s Volodko said developers may need at least a decade
to sell them.

Cheaper, Closer

The prices in Sochi are another reason Europeans are reluctant
to buy apartments, Kazanskiy said. The Karat apartments in the Hyatt Regency
hotel, which is developed by Snegiri, a company co-owned by billionaire Roman
Abramovich, are among the most expensive in Sochi.

Set to open later this year, the hotel will offer 137 flats
starting from $11,000 per square meter. They feature sea-view terraces,
wallpaper hand-decorated with Swarovski crystals and a furnished sea float.

“Spain is closer and cheaper,” Kazanskiy said.

Apartment prices jumped about 50 percent overnight in 2007 when
Sochi won thebidfor
the Olympics, Volodko said. They kept rising even during the 2008 financial
crisis on speculative purchases, reaching an average of 115,000 rubles ($3,300)
per square meter in 2013, Volodko said. That’s more than three times the figure
for all of Russia.

“Sochi prices are at a peak and won’t grow substantially, so the
property is not interesting as an investment for the moment,” said Elena
Yurgeneva, Knight Frank Russia & CIS elite property department head.

‘Getting Killed’

The Russian government is looking for ways to support developers
and save the market from “getting killed for many years,” First Deputy Prime
Minister Igor Shuvalov said in November, according to Interfax news agency.
Volodko said banks that have made loans to developers have had to take
apartments back and sell them at a 35 percent discount.

Vladimir Dmitriev, chairman of Russia’s state development bank
Vnesheconombank, said in January after a meeting with Putin that developers
will get a two-year moratorium on making loan payments. He also said a
government commission has been formed to deal with the issue of investment
returns and decide on the future of financially troubled projects. The bank
loaned 240 billion rubles to developers of hotels and sport arenas in Sochi.

Investment Return

“We understand the projects are difficult ones if we talk about
hotel infrastructure, about buildings that will be finally sold on the market,”
Dmitriev told Putin, according to a statement on the Kremlin website. “Of
course investment return from these projects in two to three years can’t be
expected.”

The government and developers will have to do more to attract
tourists and investors to Sochi after the Olympics, said Alexei Grachev,
tourism department head in the Sochi mayor’s office.

“Ideas for post-Olympic development of Sochi as a resort are at
a very initial discussion on local and federal levels,” Grachev said.

Putin already is planning more high-profile events for Sochi. He
said the city will hold a Group of Eight Summit in June and a Formula One
Championship in October on a new track near Olympic Park. Sochi also will host
the 2018 World Cup.

“We are positive, we see business trips to Sochi intensified,”
Snegiri marketing director Polina Severukhina said. “Also there rumors that
Sochi can become a gambling zone. That would raise the demand.”

Russians who don’t visit Sochi can see the enormity of its
transformation in Moscow at the Central House of Artists, where the cosmonaut’s
before and after photos are on exhibit.

Barzykin, the tourist union executive, said the rebuilding of
Sochi’s roads and electrical and sewage systems has been a success.

“What we can’t say is that Sochi is a new tourist brand ready to
be shown on the market,” he said.

Louis Redshaw,
the former head of carbon trading atBarclays Plc (BARC), returned to the
market amid a jump in permit prices since he left the bank in April.

Redshaw, 41, who resigned from Barclays in London after more
than eight years at the company, is buying and selling European Union permits
for his own account from his home in the southeast of the capital, he said by
phone, declining to provide further details. Allowances climbed 33 percent this
year, the best performance of 80 commodities tracked by Bloomberg. They rose to
their highest level in more than a year today, trading at 6.74 euros ($9.17) a
metric ton on the ICE Futures Europe exchange in London.

EU lawmakers are completing details of a plan to curb an
unprecedented oversupply and boost prices, which fell to a record in April.
Allowances may rise to as high as 15 euros by 2015, according to Patrick
Hummel, an analyst at UBS AG.

“There’s no reason why the market shouldn’t double within the
next 18 months,” said Redshaw, who also worked as a trader at Enron Corp. andElectricite de France SA. (EDF)“At 6 euros, it’s still cheap.”

Carbon trading volume on ICE jumped 21 percent to a seven-month
high in January compared with December.

As well as
postponing the sale of some permits, the European Commission is proposing a
permanent reserve of allowances to smooth future surpluses or shortages
starting 2021. Permits plunged to 2.46 euros in April as the surplus was
exacerbated by the region’s longest recession.

Regulator’s Commitment

Such a reserve is less prone to interference by politicians and
it’s based on transparent rules set out in advance, making the market
attractive, said Redshaw, who argued against intervention when he was at
Barclays. “It demonstrates the commitment of the commission to deal with the
oversupply problem,” he said.

The reserve will help restore confidence in the EU’s market,
Martin Schoenberg, the head of policy at London-based Climate Change Capital
Ltd., said.

“If the EU manages to re-establish its emissions trading system
as the central pillar of climate policy, that will create growing interest in
carbon markets across the world,” Schoenberg, who previously worked at the
Bonn-based United Nations Framework Convention on Climate Change secretariat,
said Feb. 4 by phone. Carbon prices may average about 40 euros a ton from 2019
to 2030, according to Climate Change Capital.

Redshaw began trading in early January, about a month after the
region’s parliament voted in favor of the temporary measure to curb an
unprecedented glut of permits.

“The commission’s support from the parliament cemented that fact
and the future of the market,” Redshaw said. “I’ve been watching developments
and now is the right time to get back involved.”

Axonic Capital LLC, LibreMax Capital LLC and Saba Capital
Management LP are among firms positioning to provide loans as more than $1
trillion in commercial real-estate debt originated before the property crash
comes due over the next three years, aiming to bridge the gap for borrowers
needing more cash than banks are willing to lend.

“New participants are capitalizing on that void,” said Richard
Hill, an analyst at Morgan Stanley, who said he’s surprised by the range of
investors entering the market. “The wave of loans coming due is going to create
a bottleneck. The image I get is a snake trying to swallow an elephant.”

Funds that buy
corporate debt or mortgage-backed securities that package dozens of loans are
targeting individual buildings, drawn by yields as high as 15 percent after
returns elsewhere in credit markets shrunk. The firms are wagering commercial
property values will continue to rebound after recouping 75 percent of their
decline since 2009 even with the record wave of maturing loans.

About $350 billion in commercial-real estate debt comes due
every year through 2017 after a borrowing binge last decade, according to
Morgan Stanley. The firms are aiming to provide mezzanine loans, which are
repaid after traditional commercial mortgages if a borrower defaults, making
them a riskier bet in exchange for higher yields.

Axonic Targets

Axonic, a $1.8 billion investment firm run by Clayton
DeGiacinto, will seek to lend on properties beyond major metropolitan areas
such as New York and San Francisco, where capital from around the globe has
already flooded in.

The best opportunities over the next several years will be
venturing into smaller markets, even as tenant demand is harder to predict,
according to Chris Seay, a managing director at Axonic’s Soma Specialty
Finance, the unit started last year to make the loans.

“There’s always a demand for good quality real estate no matter
where you are,” he said. “Whether it’s a Nashville,Tennesseeor a Louisville,Kentucky,
there’s no reason those markets don’t need good quality operators and good
quality real estate.”

Axonic’s Soma is making fixed-rate loans with terms of about 10
years. It completed its first deal in November, a $5.9 million loan for
shopping center Canyon Crossings in Riverside,California.
The loan, which is helping to finance an acquisition, will be subordinate to a
$40 million mortgage. Axonic’s main fund also buys shorter-term debt.

Hotel Debt

LibreMax, the $2.7 billion investment firm founded by former
Deutsche Bank AG trader Greg Lippmann, is investing in hotel debt, according to
two people with knowledge of the strategy, who asked not to be identified
because the loans are private.

Lippmann, who gained fame by betting against subprime-mortgage
bonds beforehousingcollapsed,
has made commercial-real estate a key part of his firm’s strategy as the
markets recovered.

Hotel values, which decline fastest during an economic downturn,
can rebound rapidly as room rates are reset on a daily basis. Prices on hotels
surged 17 percent in 2013, according to a preliminary reading of the
Moody’s/RCA Commercial Property Price Index.

The New York-based firm had more than 25 percent of its assets
invested in commercial real estate at the end of December, according to a
letter to investors, which showed the fund gaining 12.9 percent last year.
Lippmann declined to comment on the investments.

Weinstein’s Saba

Boaz Weinstein’s Saba, a $3.9 billion
investment firm started in 2009 to trade on price discrepancies between loans,
bonds and derivatives, moved into mezzanine real estate lending last year,
according to people with knowledge of the fund, who also asked not to be named.

The investment ties into a broader property bet for Weinstein,
the former co-head of global credit trading at Deutsche Bank. His firm was one
of the first hedge funds to start digging into the riskiest corners of the $550
billion commercial mortgage bond market last year by purchasing securities that
are first in line to take losses from new deals.

Investment in commercial real estate debt is increasing as sales
of securities linked to properties ranging from mobile home parks to Hawaiian
resorts are poised to climb to $100 billion this year after doubling to $80
billion in 2013, according to data compiled by Bloomberg.

Singer’s Management

Billionaire Paul Singer’s Elliott Management Corp. is backing a
venture with Silverpeak Real Estate Partners that will originate mortgages to
be parceled into CMBS, as well as make other types of loans such as mezzanine
debt. In a December letter to investors, Elliott cited the “strength and growth
in the new issue market,” and a “significant capital hole in need of filling,”
as boom-era loans mature.

Separate from Silverpeak, Elliott is investing $75 million for a
hotel and condominium project inManhattan,
according to a person with knowledge of the deal. The preferred equity will
yield between 15 and 20 percent, said the person, who asked not be named
because the deal is private.

Mezzanine debt was frequently used in real estate leading up to
the crash as landlords ramped up their use of borrowed money to help pay record
prices for buildings. While a boon for borrowers at the time, excess leverage
was at the root of some of the most disastrous real estate acquisitions.

David Lichtenstein’s Lightstone Group LLC boughtExtended Stay Hotels (STAY),
a chain of mid-priced hotels, for $8 billion at the top of the market in 2007.
The purchase was fueled by $7.6 billion in debt including more than $3 billion
of mezzanine loans that were wiped out when the hotel operator filed for
bankruptcy in 2009.

Mega Transactions

The deal “was the poster child of the highly-leveraged mega
transactions of 2007,” said Ed Shugrue, CEO of Talmage LLC, which oversees $2
billion in commercial property debt. “A lot of pain was inflicted.”

Banks tightened lending standards in the wake of the financial
crisis, leading to lighter debt loads. Commercial mortgages in today’s CMBS
deals are still more conservative than they were leading up the crash,
according to Shugrue, though concern is mounting that underwriting standards on
new bonds are slipping. Pinpointing individual buildings could give investors
more oversight if a loan defaults. That’s an attractive proposition for firms
that want to underwrite their own deals and handle problems when they arise.

“Investors increasingly want to control their own destiny,”
according to Morgan Stanley’s Hill.

Lending Infrastructure

It may be difficult for funds without the lending infrastructure
to break into the mezzanine market, according to Harris Trifon, a debt analyst
at Deutsche Bank AG. It takes more due diligence and loans are not as easy to
buy and sell as securities, he said.

The extra effort is worth it, according to Axonic’s Seay. Newly
issued bonds rated BBB-, the lowest investment-grade ranking, are yielding
about 6.6 percent, according to data compiled by Bloomberg. The 10-year
mezzanine debt made by Axonic is paying as much as 11 percent annually, Seay
said.